...University FIN 555: Financial Management Summer 2013 Thomas M Carroll Phone: 312.362.8826 Office: Loop Campus tcarroll@depaul.edu Case Study Questions Capital Budgeting In Practice Ocean Carriers These questions relate to the Ocean Carriers case in your course packet. You can find the data for this case on the course website in a spreadsheet named: Ocean Carriers Exhibits.xls. This case provides the opportunity to make a capital budgeting decision by using discounted cash flow analysis to make an investment and corporate policy decision. Ocean Carriers is a shipping company evaluating a proposed lease of a ship for a three-year period beginning in 2003. The proposed leasing contract offers very attractive terms, but no ship in Ocean Carrier’s current fleet meets the customer’s requirements. The firm must decide if future expected cash flows warrant the considerable investment in a new ship. 1. Do you expect daily spot hire rates to increase or decrease next year? Give the reasons for your choice. Which are the factors that drive average daily rates? What does this imply in terms of your cash flow projections? 2. How much is the cost of a new vessel in present value terms? What is the book value of the ship? 3. Should Ms Linn purchase the capesize carrier? Assume that it is going to be sold for scrap after 15 years. [Hint: Construct the Free Cash Flows of the project!] Explain the reason for constructing the free cash flow...
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...Ocean carriers has been approached by a customer who is offering attractive terms for a three year ship lease. However, there is no existing ship that meets the customer’s needs, so Mary Linn, Vice President of Finance, must decide if we should purchase a new ship that will meet the customer’s demands for $39 million. Since the lease is only for three years we need to analyze if by continuing to operate the ship for other charterers will be a profitable project for Ocean Carriers. It is the company’s policy not to operate a ship older than 15 years. At the end of the 15 year period the scrap value of the ship is estimated to be $5 million. Ocean Carriers charges a daily higher rate for the ships and usually earns a 15% premium to the industry, due to younger and larger ships. However, the availability of capsize ships is increasing so it is likely that the daily higher rate will decrease. The cost of operating a capsize ship is currently $4000 per day and is expected to increase at 1% above inflation. With increasing operation costs and a decreasing daily hire rate we must be cautious about the investments we make in new ships. I have explored four cases of analyzing the Net Present Value of the project. Case 1 The first case explores commissioning a United States based ship for fifteen years. In the case we assume the first 3 years are a guaranteed lease to the customer we are building the ship for, where we will receive a $20,000 daily higher rate that will increase...
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...Michael Depersia Ocean Carriers needs to evaluate the decision to commission a new capesize carrier. Mary Linn, Vice President of Finance, needs to decide if this is a profitable decision for the company. In determining whether Ocean Carriers should purchase the new capesize carrier for the potential customer, we completed a net present value analysis of the project. In order to do this we need to take many things into account including, but not limited to, depreciation, opportunity costs and networking capital. To begin, we calculated the revenue given expected daily hire rate that could be expected over the lifetime of the vessel. We chose to use the expected daily hire rate because it most accurately represents Ocean Carrier’s cash flows. The initial investment was 10% of the purchase price in first year, which amounted to $3,900,000 paid in the beginning and the end of the first year. Beginning in 2003, the operating costs for the vessel were $1,460,000 ($4,000 per day), growing at a rate of 1% per year. For the 15 year analysis, we first subtracted the $5,000,000 salvage value and used straight-line depreciation over 15 years, which was $2,667,667 per year. Depreciation is important for this calculation because it allows the firm to recognize the wear and tear on the vessel by decreasing the worth of the asset. The straight-line depreciation method allows firms to allocate fixed reductions in the asset's value over its useful life. It is calculated by the acquisition cost...
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...Guide for Case Analyses “Ocean Carriers” Objectives of case: The key objective is to develop an understanding of how discounted cash flow analysis can be used to make investment and corporate policy decisions. 1. Determine the value and net present value of a real assets; 2. Distinguishing between book value and market value; 3. Identifying and forecasting incremental expected cash flows, including initial and ongoing capital expenditures, investment in net working capital, and proceeds from asset sales; 4. Understanding the tax consequences of depreciation and asset sales; 5. Evaluating whether a policy of reselling or scrapping a vessel is most valuable. Guideline questions to cover in the case analysis: 1. What is the key issue addressed in this case? Or in other words, what is the major decision to be made by Ocean Carriers? 2. Do you expect daily spot hire rates to increase or decrease next year? 3. What factors drive average daily hire rates? 4. How would you characterize the long-term prospects of the capsize dry bulk industry? 5. Help Ms. Linn to make the purchase decision on the $39M capsize: should she buy it? Make two assumptions – first assume that Ocean Carriers is a U.S. firm subject to 35% taxation. Second, assume that Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are not required to pay any tax on profits made overseas and are also exempted from paying any tax on profit made on cargo...
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...Ocean Carrier Case Study Summary In order to accept the recently submitted leasing contract proposal, Ocean Carriers would have to purchase a new ship. The purchasing of a new ship is a considerable investment. We have analyzed whether or not Ocean Carriers should make this investment using Free Cash Flow and Net Present Value (NPV) analysis. Given the details of the contract, the forecasted daily time charter rates, and the costs data; we have concluded that Ocean Carriers should not accept the proposal and purchase a new ship if the company’s plan is to scrap the ship in 15 years. The NPV of this option is negative, roughly -$43,705, which means that Ocean Carriers would lose money over the life of this project. However, further analysis has concluded that operating the ship for its entire useful life, 30 years, can produce a positive NPV, roughly $2,107,016. So Ocean Carriers’ should consider taking on this proposal only if they can continue operating the ship for 30 years. *Please see assumptions and capital budget details. Answers to Case Questions 1) Spot hire rates will likely decrease in the near term, 2001 and 2002. Imports for ore look to be flat and won’t likely increase for the next two years. With 63 new capsizes scheduled for completion in 2001 there will likely be an overage of supply in the near term. Daily rates are driven by supply and demand as well as the trade patterns. With additional cargo carriers entering the fleet and depressed demand...
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...demand on vessels service over the long run. 3. Do you expect daily spot hire rates to increase or decrease next year? Why? Spot rate is expected to fall in 2001 and 2002, because 63 new vessels were scheduled for delivery in 2001 and that imports of iron ore and coal would probably remain stagnant over the two years. Another important fact is that old vessels accounts for a small percentage of the existing vessels and there won’t be a significant reduction in supply due to scraping of old vessels. 4. Show the Free cash flow from operating the new capsize vessel in the first five years. Please refer to the Table 1 below, which shows the free cash flows from operating the new capesize of US firm and HK firm in the first five years. Key Assumptions: 1) The Special Survey capital expenditures were depreciated on a...
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...Case 1: Ocean Carriers Our first case study is entitled Ocean Carriers (HBS Case No. 9‐202‐027) by Erik Stafford et al. Please go to the Harvard Business Publishing website http://hbsp.harvard.edu . The case is copyright‐protected and can be purchased after registration. Please register at the Harvard Business Publishing website with a student account. After login, make use of the following link: https://cb.hbsp.harvard.edu/cbmp/access/42497623. Integrate answers/discussions to the following questions into your memo (Please don’t write separate answers for each question, and also the order when you answer them is not relevant. Your memo should consist of one comprehensive and well‐structured text.) Assume that Ocean Carriers uses a 9% discount rate for its investments. Questions: 1. Do you expect daily spot hire rates to increase or decrease next year? 2. What factors drive average daily hire rates? 3. How would you characterize the long‐term prospects of the capesize dry bulk industry? 4. Should Ms Linn purchase the $39M capesize? Make 2 different assumptions. First, assume that Ocean Carriers is a U.S. firm subject to 35% taxation. Second, assume that Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are not required to pay any tax on profits made overseas and are also exempted from paying any tax on profit made on cargo uplifted from Hong Kong. 5. What do you think of the company’s policy of...
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...Case 1 – Ocean Carriers Kevin Gordon 2543984, Camiel Hamstra, & Marloes Schrijer 2518578 Ocean Carriers is a shipping company with offices in New York and Hong Kong. In 2001, Vice President of Finance, Mary Linn, has to decide whether Ocean Carriers should commission a new capesize carrier to meet the specific requirements of a customer. The proposed contract, however, is only for three years. Linn needs to decide if the considerable investment in a new ship is worth it, given the future market conditions. Ocean Carriers supplies vessels to charterers for a daily hire rate for the entire length of the contract. These daily hire rates are determined by supply and demand of capesizes. The supply side is determined by the number of ships available in the previous year plus new deliveries minus the scrappings and sinkings. Additionally, supply also rose by the size and efficiency of the new vessels. From Figure 1, we can see that $2 millions of deadweight tons will be scrapped which will lower the supply. However, at the same time we notice from Figure 2 that in 2001, 63 new vessels will be delivered. Thus, the supply of capesizes will increase in 2001. Demand for dry bulk capesizes is strongly determined by its basic industries, as 85% of the cargo contains iron ore and coal. In Figure 3, we can clearly see this correlation. The average daily hire rates move strongly in accordance to the number of iron ore vessel shipments. Average daily hire rates are also higher when...
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...Case 1: Ocean Carriers Our first case study is entitled Ocean Carriers (HBS Case No. 9‐202‐027) by Erik Stafford et al. Please go to the Harvard Business Publishing website http://hbsp.harvard.edu . The case is copyright‐protected and can be purchased after registration. Please register at the Harvard Business Publishing website with a student account. After login, make use of the following link: https://cb.hbsp.harvard.edu/cbmp/access/42497623. Integrate answers/discussions to the following questions into your memo (Please don’t write separate answers for each question, and also the order when you answer them is not relevant. Your memo should consist of one comprehensive and well‐structured text.) Assume that Ocean Carriers uses a 9% discount rate for its investments. Questions: 1. Do you expect daily spot hire rates to increase or decrease next year? 2. What factors drive average daily hire rates? 3. How would you characterize the long‐term prospects of the capesize dry bulk industry? 4. Should Ms Linn purchase the $39M capesize? Make 2 different assumptions. First, assume that Ocean Carriers is a U.S. firm subject to 35% taxation. Second, assume that Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are not required to pay any tax on profits made overseas and are also exempted from paying any tax on profit made on cargo uplifted from Hong Kong. 5. What do you think of the company’s policy of...
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... Ocean Carriers November 2015 EXECUTIVE SUMMARY Due to an attractive lease agreement proposed by a larger client, the investment department has conducted an extensive evaluation of the possibility to invest in a new $39 million capesize carrier. This material should be distributed as a basis for the decision regarding the commission of the carrier and includes current assumptions and calculations. The investment department has come to the absolute conclusions to decline the offer to enter into the lease agreement, due to the unprofitability of commissioning a new vessel. This conclusions hold both under U.S. tax law as well as Hong Kong tax law. The net present value of the project is currently -$6,968.828 under U.S. tax law and -$1,228,132 under Hong Kong tax law. The internal rate of returns is 5.5% under U.S. tax law and 8.4% under Hong Kong tax law. The project has been discounted at Oceans Carriers current hurdle rate of 9%. Investment Opportunity Ocean Carriers are currently in negotiations with a well esteemed charterer regarding a three-year charter on a capesize ocean freighter. Our client has made an offer of $ 20,000 per day with an annual escalation of $200 per day starting in the beginning of year 2003. As we, Ocean Carriers, do not currently...
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...Case Study 1 – Ocean Carriers 1. The Capital Budgeting Decision Should Ms. Linn purchase the Capesize vessel? Assume that Ocean Carriers is a U.S. firm and is subject to 35% taxation. (Please see excel sheets) From our analysis it appears that Ms. Linn should not buy the Capesize vessel. The Net Present Value on the Ocean Carrier is not a positive number, a clear indicator that buying the vessels is not a good idea. The tax rate of 35% makes a lot of difference in determining this NPV. In our calculations we did assume a tax rate on the final sale of the vessel. If it were possible, or known, the tax rate on the salvage it might be more feasible to buy the vessel, and end up with a positive NPV. The effect of taxes on EBIT and thereby NPV is easily seen in our analysis numbers. As taxes remain steady and profits from operations falls, the prudence of the investment becomes apparent. Assume that Ocean Carriers in based in Hong Kong, where owners of Hong Kong ships are not required to pay any tax on profits made overseas and also are exempt from paying any tax on profit made on cargo uplifted from Hong Kong. (Please see excel sheets) If the tax rate were a non-issue it would make sense to buy the vessel. Running our analysis with a zero tax rate gave a positive NPV. This is due to the effects of taxes on EBIT. While it is more realistic to expect a tax rate, draw of having a zero tax rate would make this project more attractive to management, and possible. It may...
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...Term 1 Case questions Case #A: Butler Lumber Company Questions 1. Why does Mr. Butler have to borrow so much money to support this profitable business? 2. Do you agree with his estimate of the company’s loan requirements? How much will he need to borrow to finance his expected expansion in sales (assume a 1991 sales volume of $3.6 million)? 3. As Mr. Butler’s financial advisor, would you urge him to go ahead with, or to reconsider, his anticipated expansion and his plans for additional debt financing? As the banker, would you approve Mr. Butler’s loan request, and, if so, what conditions would you put on the loan? 4. Has Butler Lumber Company created value for shareholders? Hint: It might help you to analyze the case if you conduct the following analyses: 1. 2. 3. 4. Construct a common-size (percentage) income statement. Construct a common-size (percentage) B/S Using information from 1&2 to find out the operating efficiency Assuming the same operating efficiency in 1990, forecast cash needs for the target growth Case #B: Ocean Carriers Questions Ocean Carriers uses a 9% discount rate. 1. Do you expect daily spot hire rates to increase or decrease next year? 2. What factors drive daily hire rates? 3. How would you characterize the long-term prospects of the capesize dry bulk industry? 4. Should Ms Linn purchase the $39M capesize? Make 2 different assumptions. First, assume that Ocean Carriers in a U.S. firm subject to 35% taxation. Second, assume that Ocean Carriers is...
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...Background Ocean Carriers Inc. is a shipping company specializing in the operation of capsizes bulk dry carriers. In January 2001, Mary Linn, the vice President of Finance for Ocean Carriers was evaluating the purchase of a new capsize carrier for a three years lease proposed by a motivated customer. The leasing contract offers very attractive terms, but no ship in Ocean Carrier’s current fleet met the customer’s requirements. In addition, this proposed contract is only for three years. Therefore, after three years, the new capsize carrier will have to be leased to other customers. So considering in the long run, Linn had to decide whether Ocean Carriers should immediately commission a new ship which could be completed in two years. In the same time, she would have to consider if the company should still follow the policy of scrapping a vessel after 15 years, even though such vessel has a product life of 25 years. Analysis There are two main factors would affect the daily spot hire rates which are the number of available vessels and imports of iron ore and coal. From the Exhibit 3 of this case, we know that 63 new vessels were scheduled for delivery in 2001. This number decrease to 33 in 2002 and 21 in 2003. So we can infer that the demand of new vessels is saturated temporary. Besides, with Australian production in iron ore expected to be strong and Indian iron ore exports expected to take off in the next few years, we can infer the long-term market demand for capsizes will...
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...Case #1: Butler Lumber Company Questions 1. Why does Mr. Butler have to borrow so much money to support this profitable business? 2. Do you agree with his estimate of the company’s loan requirements? How much will he need to borrow to finance his expected expansion in sales (assume a 1991 sales volume of $3.6 million)? 3. As Mr. Butler’s financial advisor, would you urge him to go ahead with, or to reconsider, his anticipated expansion and his plans for additional debt financing? As the banker, would you approve Mr. Butler’s loan request, and, if so, what conditions would you put on the loan? 4. Has Butler Lumber Company created value for shareholders? Hint: It might help you to analyze the case if you conduct the following analyses: 1. 2. 3. 4. Construct a common-size (percentage) income statement. Construct a common-size (percentage) B/S Using information from 1&2 to find out the operating efficiency Assuming the same operating efficiency in 1990, forecast cash needs for the target growth Case #2: Ocean Carriers Questions Ocean Carriers uses a 9% discount rate. 1. Do you expect daily spot hire rates to increase or decrease next year? 2. What factors drive daily hire rates? 3. How would you characterize the long-term prospects of the capesize dry bulk industry? 4. Should Ms Linn purchase the $39M capesize? Make 2 different assumptions. First, assume that Ocean Carriers in a U.S. firm subject to 35% taxation. Second, assume that Ocean Carriers is located in Hong Kong, where...
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...Lamp Place Incorporated Logistics Plan | Prepared for Scott Bennie - TMDT 1150 & James Peterson - COMM 2200 | April 10, 2011 Tom (Zaiyi) Liu INTT 2A | Executive summary Our consulting firm has been hired to assist Lamp Place Incorporated (LPI) with a product roll out in Canada. LPI wants to test the viability of the Canadian market by introducing a Prestige line of lamps. Previously, the lamps are being produced by an Indian supplier, who ships four containers of lamps (1,536 cartons) on a weekly basis to the Port of Halifax. After the arrival of these containers at the Port of Halifax, the lamps are then transferred to each of the LPI’s contracted distribution centres through rail and truck. The total cost of this whole process is $24,439 per week, or $1,270,815 per year. Currently, a new supplier based in Montreal has been identified as a comparable alternative to the India supplier. The Montreal supplier offers the same product with $8.10 higher unit price. But the transportation costs are significant lower, as it only costs LPI $11,000 per week and $572,000 per year. One thing to note is that, the Montreal supplier uses a 53’ container to transport the product; therefore, there will be a possibility of 100 more lamps to be shipped with every container. After an analysis both of the suppliers of their cost, convenience, environmental...
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